SMEs ‘over-reliant’ on banks, but gradually changing

SMEs are “over-reliant” on credit from banks, the OECD has claimed, but are increasingly turning towards alternative sources of business funding.

The Organisation for Economic Co-operation and Development (OECD) released a new report which found that, although banks still dominate in funding small businesses, new bank lending is declining in a number of countries.

Financing SMEs and Entrepreneurs 2018: An OECD Scoreboard shows that a rise in venture capital investments and private debt to SMEs occurred in most participating countries in 2016, along with rapid growth in peer-to-peer lending, equity crowdfunding and invoice trading.

The use of online alternative finance was especially high in China, the United Kingdom and the United States, the report found, while leasing, hire-purchase activities, factoring and invoice discounting, which are based on asset value rather than credit standing, also rose for a second consecutive year.

Further, the OECD found that a continued decline in SME bankruptcies in 2016 pointed to improved business conditions.

The Scoreboard found a median year-on-year drop of 6.5 per cent in bankruptcies in 2016, following a drop of 6.9 per cent in 2014 and 9.1 per cent in 2015.

Payment delays and non-performing loans also remained at relatively low levels in a majority of countries studied.

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According to the OECD, SMEs are also benefiting from “favourable credit conditions and low interest rates”. The median value of the average interest rate charged to SMEs fell by 0.82 percentage points on the year.

Despite these positive developments, however, the report outlined that new bank lending to SMEs fell in 15 out of 25 countries for which data was available in 2016, and the median value growth rate in new SME lending fell from 2.6 per cent in 2015 to -5.6 per cent.

Accessing appropriate sources of finance also remained “problematic” for certain categories of small business, in particular micro-enterprises, young SMEs and start-ups, and innovative and growth-oriented ventures.

The OECD therefore called on governments to do more to foster both traditional and alternative financing instruments for SMEs, in line with the G20/OECD High Level Principles on SME Financing.

The organisation stated: “SMEs and entrepreneurs constitute the backbone of OECD economies, accounting for 70 per cent of total employment and 50-60 per cent of value added. They are key to strengthening productivity, delivering more inclusive growth and adapting to megatrends such as the new industrial revolution, the changing nature of work and demographic changes.”

OECD secretary-general Angel Gurríaadded: “Challenges persist in SME access to finance, but this visible growth in financing alternatives is very positive news.

“In any economy, small businesses are essential to innovation, competitiveness and inclusive growth. Providing reliable access to finance to such companies throughout their lives is crucial if they are to prosper and fully contribute to our economies and well-being.”

The seventh edition of the SME Scoreboard collected data on debt, equity, asset-based finance, solvency and framework conditions to assess SME access to finance over 2007-16 in 43 countries, and includes detailed individual profiles of each participating country.

The OECD report noted that SMEs accounted for 99.8 per cent of all enterprises in Australia, at just over 2.1 million in 2015/16.

It found that SME loans accounted for around 30 per cent of all outstanding business loans in Australia in 2016 and added that the average interest rate charged to SMEs in Australia between 2013 and 2016 were between 5.1 to 6.5 per cent - nearer the higher end of rates when compared to other OECD countries.